Inflation and retail sales — What you need to know for the week ahead

On Friday, the February jobs report showed that 313,000 jobs were created in the second month of the year, the most in any month since the middle of 2016 and a sign that the economic recovery now in its 10th year still has plenty of steam.

Following this report, stocks soared higher into the weekend with the major averages each gaining more than 1.7% on Friday.

The tech-heavy Nasdaq made a new high for the first time since January as markets continue to claw back toward record levels seen before the early February plunge that sent the S&P 500 down over 10% in just a handful of trading days.

Stocks soared to end the week after a better-than-expected jobs report on Friday. EFE/EPA/JUSTIN LANE

The only weak spot in Friday’s report was wages, as average hourly earnings rose 0.1% over the prior month and 2.6% over the prior year, both less than expected.

Daniel Silver, an economist at JPMorgan, said wage growth in February was actually not as soft as these headline numbers might indicate, noting that, “The upward revision to the workweek in January, to 34.4 hours, and further tick-up in February to 34.5 hours, implies that total labor income is actually now growing faster than thought after the January report.”

Paul Ashworth, chief U.S. economist at Capital Economics, said in a note Friday that February’s report shows the economy is doing even better than recent data have suggested. This indicates that the split between strong soft data readings and more middling hard data we discussed earlier this month could be resolving to the upside. Which is to say that surveys indicating the economy is booming may be leading indicators of an upswing in growth, not a sign of overzealous consumers and business owners.

In the week ahead, markets will get two more key checks on the economy with the February reading on consumer prices due out Tuesday morning and the February check on retail sales expected out Wednesday.

For most economists, Friday’s report all but confirmed that the Federal Reserve will raise interest rates in its March 21st policy statement, but this week’s data could give markets a sense of whether inflation pressures or a consumer spending boom could press the Fed to be more aggressive into the second half of 2018.

And on the earnings side, fourth-quarter earnings season continues to wind down, while the retail sector remains in focus with notable results this week set to include Dollar General (DG), Ulta Beauty (ULTA), Adobe (ADBE), Tiffany (TIF), and Dick’s Sporting Goods (DKS).

A new gear for the U.S. economy

With the unemployment rate at 4.1% and the U.S. economy having created nearly 20 million jobs in the last decade, few economists would have expected to see a month in which 313,000 jobs were created, a three-month period in which 242,000 jobs have been created per month, or a six-month stretch that includes a major natural disaster in which an average of 205,000 jobs created each month.

And yet here we are.

Rick Rieder, BlackRock’s Chief Investment Officer of Global Fixed Income, said Friday that the “number of people being hired at this point in the economic cycle is quite staggering…And there is no sign of this job growth slowing down.”

Meanwhile, the benefits of the tax cut passed by the Trump administration in late 2017 are just now beginning to work their way through the economy. Rieder writes that, “Many market observers aren’t considering closely enough this year is that the economy is operating with this kind of employment dynamic, which has been quite strong for roughly eight years now, and we’re about to get roughly $300 billion of fiscal stimulus and tax benefits that will be implemented aggressively into the economy throughout the next few years.”

Whether one agrees with the move by the Trump administration and the GOP to pursue tax cuts at this point in the economic cycle or not, it is clear that this fiscal stimulus is going to add fuel to an economic fire that continues to burn bright.

“The February employment report was an absolute knockout with strong growth in payroll employment and a sharp increase in labor force participation,” said Neil Dutta, an economist at Renaissance Macro.

“The pick- up in the labor force implies little need at this juncture for the Fed to speed up the pace of its rate tightening campaign. However, it does indicate rising potential growth. That combination should support curve steepening in the fixed income market. Strong growth in payroll employment is not typical if the economy is ‘late-cycle.’ There is still room to run in this labor market recovery.”

And so perhaps not unlike the stock market’s rally, which has been roundly doubted by skeptics ever since we first made new post-crisis highs in 2013, the economy appears to be on firmer footing in the tenth year of an economic expansion than many thought possible.

Last Friday, we’d also note, marked the ninth anniversary of the post-crisis bottom. Nearly a decade beyond the onset of the financial crisis, it may be hard to remember how deep those economic scars were. But jobs reports like Friday ought to serve as a reminder that the U.S. economy essentially stalled from 2007-2010. How long it’s taken to get back up to speed will likely continue to surprise.

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Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland